Lockbox Logic

Lockbox Logic

Lockbox Logic

The transformation that began with the election of Ronald Reagan is now complete. The Democrats, once known as pump-priming Keynesians, have become the party of fiscal responsibility. Republicans, who for decades clung tenaciously to the faith of balanced budgets, now dismiss deficits as an irrelevancy.

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This role reversal took place in stages. The first stage, lasting from 1981 to 1992, was the growth of structural deficits produced by Ronald Reagan's 1981 tax cut. Throughout the decade, Republicans, including Reagan himself, continued to call for a balanced-budget requirement to be added to the U.S. Constitution. But this was a mere hypocritical flourish in the face of the wildly unbalanced actual budgets Reagan submitted to Congress and signed into law year after year. George H. W. Bush continued on this path, though like Reagan he yielded to pressure for a tax increase that would mitigate some of the damage.

The second stage, lasting from 1993 to 2000, was Bill Clinton's reversal of the deficit spending trajectory. Clinton's original economic plan dealt with the weak economy he inherited from his predecessor not through the traditional liberal approach of more public-sector spending, but primarily by the unorthodox means of deficit reduction. This responsible, politically costly effort led directly to the budget surpluses that began to accrue toward the end of the Clinton presidency. When Clinton first embraced the idea of a balanced budget in 1995, many congressional Democrats were furious at him. By the middle of his second term, however, most of them embraced not only the notion that government shouldn't spend more than it takes in, but also that it should devote the growing surpluses in Social Security's account to reducing the national debt.

During campaign 2000, it seemed possible that budgetary balance had become a consensus goal of both parties. As a candidate, George W. Bush picked up Al Gore's terminology, agreeing that the portion of the budget surplus deriving from Social Security taxes should be set aside in a "lockbox" to pay down debt. But the tax cut Bush proposed was so large that it menaced the contents of the box. Once inaugurated, it became clear that Bush was reverting decisively to Reaganite type. Faced with the choice of a smaller tax cut or the very great likelihood of dipping into the Social Security surpluses, Bush's Office of Management and Budget offered a rosy scenario that suggested, implausibly, that there was no trade-off to be faced.

Whereas Democrats have come around to balanced budgets on the theory that they enable government to take on problems, Bush and the Republicans see insolvency as a way to disable government. David Stockman, Reagan's first budget director, never quite admitted creating the deficit in an intentional effort to "starve the beast" of federal government. But under Bush, fiscal malnourishment has become explicit policy. One of the chief rationales for his tax cut was to get the budget surplus "out of Washington" before Congress had a chance to spend it. This argument is both familiar and dishonest. Like Reagan, Bush has proposed getting significantly more money out of Washington than Washington has already committed to spending--with the president's full support. And again like Reagan, Bush habitually blames Congress alone for the sin of overspending despite the fact that he not only doesn't oppose specific appropriations of any significance but in fact proposes large increases in favored areas, namely the military and education. In this case, the accusation of overspending is even more absurd, since Congress was under the GOP's full control when Bush began shifting blame for any potential insolvency toward Capitol Hill.

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These issues came to the fore again last week, when the Republican-inclined but still somewhat independent Congressional Budget Office offered its estimate that Bush's tax break will cut so deeply into this year's surplus that it will breach the Social Security portion of that surplus by $9 billion. The administration's initial response to this was to claim that Bush had always made an exception to his lockbox promise for war or recession (though he never had). In an interview with reporters, Bush's budget director, Mitch Daniels, added that the current economic slowdown is as good as a recession, creating a scenario under which the lockbox could be picked without Bush being guilty of breaking his word. Daniels is a case study of the new fiscally irresponsible Republican. True to the debt-happy legacy of the Reagan administration in which he once served, he ridicules debt reduction as paying off foreign bondholders.

Somewhat sanctimonious in their new role as the responsible party, Democrats have given themselves over to paroxysms of scolding. The deftest of them is Tom Daschle, the mild-mannered Senate majority leader. When he visited the White House this week, Daschle got Bush to dig himself in deeper by reiterating his commitment not to draw on Social Security funds. Daschle knows that Bush can't keep the lockbox locked this year without either scaling back his tax cut or proposing significant cuts in domestic programs, two courses of action likely to result in political damage to the president. But that's not Daschle's problem. You got us into this mess, he says to Bush. You get us out of it.

Knowing commentators tell us that all this skirmishing is based on a phony issue because the Social Security Trust Fund is an accounting fiction and the lockbox a mere metaphoric elaboration of that fiction. Moreover, they say, everyone knows we're going to dip into the Social Security surplus this year. There's a sense in which they're right to dismiss the Bush-Daschle debate and a sense in which they're not. It's true that there is no separate piggy bank for Social Security and that dipping in to the tune of $9 billion poses no danger to the programs--though Democrats dearly hope that voters misunderstand and think it does. The Democrats are also crying crocodile tears over this year's "raid" since the tax rebate, without which there would be no shortfall, was their idea in the first place.

The way that all of this does matter, and matter enormously, is in terms of how well the government is equipped to handle the enormous liability it faces when the baby boom generation retires, beginning in 2011. If by that time we have "lockboxed" Social Security's surpluses in the sense of using them to pay down the national debt, this problem will be vast but just possibly manageable. If, on the other hand, Bush brings back structural deficits and expands the national debt, the country will be in a poor position to address the huge costs of the baby boomers' retirement.

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The revised CBO estimates indicate that there isn't much of a problem. They show on-budget surpluses (not counting Social Security) returning again in 2005 despite the Bush tax cut and the national debt dwindling to insignificance by the end of the decade. But there's reason to be skeptical about these forecasts. For one thing, they don't include any of Bush's big programmatic commitments, from missile defense to prescription drugs for the elderly, which could easily cost between $1.1 and 1.9 trillion over the next 10 years. For another, they're based on optimistic assumptions about the economy, including real growth of 3.2 percent per year after 2002, as well as rates of interest, inflation, and unemployment that are very low by contemporary standards. Nirvana could return and remain. But the conservative, fiscally responsible assumption to make is that economic conditions will be typical of the last 30 years rather than typical of the last five. And if conditions do prove typical of the longer time frame, this year's $9 billion lockbox raid could be the tip of a very large iceberg indeed. In other words, the Democrats are using a convenient myth to illustrate a genuine long-range problem.

But if it's true only in the long term, Tom Daschle's current argument is likely to be politically effective only in the short term. The reason is that lockbox logic threatens to paint Democrats into a corner of their own. The Bush administration's newest adjusted position is that it will honor the lockbox after all. The president says that it's up to Congress to pass appropriations bills that stay within the limits. If Bush continues to call Daschle's bluff in this way, congressional Democrats may find themselves faced with a choice between accepting stagnant spending levels and sharing complicity for a bipartisan assault on the cookie jar. Their only other option is to call for a rollback of the Bush tax cut, which would be politically hazardous, practically unlikely, and--in the midst of an economic slowdown--substantively dubious. In this way, the Democrats may discover there's no reward for fiscal responsibility.

Mickey Kaus responds to this piece--"Boy, am I not convinced"--here. Jacob Weisberg takes another shot inthisfollow-up.